#Fincabulary 33 – Bull Trap

Meaning –  A bull trap is a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline. The move “traps” traders or investors that acted on the buy signal and generates losses on resulting long positions. A bull trap may also be referred to as a whipsaw pattern.

AMZN-111511
Source: http://www.stockcharts.com

It results from the absence of sufficient buyer interest to decisively reverse the downtrend. Traders who buy the stock on seeing it moving up for a while get trapped at a higher price point once the price reverses to continue its downward trend. Some traders use an appropriate stop loss order instructing their brokers to sell the stock once it falls below its previous minor low in order to avoid further losses.

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